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UNITED WIRE

May 27, 1992

UNITED WIRE, METAL & MACHINE HEALTH AND WELFARE FUND, et al., Plaintiffs,
v.
MORRISTOWN MEMORIAL HOSPITAL, et al., Defendants.



The opinion of the court was delivered by: ALFRED M. WOLIN

 WOLIN, District Judge

 Currently before the Court are defendants' and plaintiffs' cross-motions for summary judgment. initially, this Court finds that the Eleventh Amendment does not prevent this Court from deciding any claims brought against the state agencies and the officials employed by the State of New Jersey. Likewise, this Court finds that New Jersey's hospital rate setting mechanism does not constitute a tax, and therefore the Tax Injunction Act does not foreclose this Court from deciding the issues before it.

 This Court will grant defendants' motions for summary judgment as to plaintiffs' federal constitutional claims. This Court further holds, however, that ERISA pre-empts certain provisions included in New Jersey's scheme for regulating hospital rates and the regulations promulgated thereunder. Therefore, this Court finds that New Jersey's hospital rate setting scheme is unenforceable. Due to the potential impact of its decision, this Court will stay its Order for a period of ten days to afford the parties an opportunity to appeal the Court's ruling to the Third Circuit Court of Appeals.

 I.INTRODUCTION

 Several self-insured union employee welfare benefit plans (the "Benefit Plans") qualified under the Employee Retirement Income Security Act 29 U.S.C. § 1002 et seq, as amended ("ERISA") and their participants (the "individual plaintiffs") (collectively the "plaintiffs"), have brought an action in which they seek a declaration that New Jersey's scheme for setting hospital rates is invalid. *fn1" Plaintiffs argue that this Court must strike down the method New Jersey utilizes for determining hospital rates on both federal and state constitutional grounds and because ERISA pre-empts the state statute.

 The gravamen of the complaint focuses on charges included within the hospital billing procedure which are in excess of a patient's "actual hospital costs." These include: costs of care for the indigent, charges to pay a hospital's bad debts, subsidies for the medicare program, and fees to reimburse hospitals for discounts given by the hospitals to other types of benefit plans.

 This Court has jurisdiction over plaintiffs' claims brought under the United States Constitution, ERISA and the Taft-Hartley Act pursuant to 28 U.S.C. § 1132. This Court has jurisdiction over plaintiffs' causes of action that arise under New Jersey's Constitution under the principles of pendent jurisdiction and supplemental jurisdiction, 28 U.S.C. § 1367.

 In the exercise of its discretion, however, this Court declines to consider the Carpenter's Union's claim that this Court should force the Hospital Defendants to reimburse the charges paid by the Carpenter's Union under protest. The Court declines to exercise its pendent jurisdiction and supplemental jurisdiction over this state law claim in the interest of comity. The Carpenter's Union argues that the fees should be reimbursed because they were paid under compulsion -- the hospital rate setting regulation forces a hospital to institute collection actions against parties who refuse to pay DRG rates. The New Jersey State Court's have never faced this issue. Moreover, the Hospital Defendants commenced related actions, which are currently pending in New Jersey, in which they seek reimbursement from plaintiffs who failed to pay the contested charges. In view of the interrelatedness of these actions, this Court will defer to the New Jersey State Courts. *fn2" Venue is proper in this district under 28 U.S.C. § 1391.

 II. BACKGROUND

 In 1971 New Jersey enacted the Health Care Facilities Planning Act (the "Act"), a hospital rate setting scheme for Blue Cross and certain federally funded programs such as Medicaid. L. 1971 c. 136 § 18. Rates were based primarily on a hospital's actual costs for each patient who participated in the programs encompassed by the law. In 1978, New Jersey passed a statute that amended the 1971 legislation and, in part, mandated rate setting for all payors. L. 1978 c. 83 ("Chapter 83"). Chapter 83 contained a dual purpose: to "contain the rising costs of health care services, and to ensure the financial solvency of hospitals."

 Chapter 83 designed an interconnected regulatory system to embrace its purposes. Chapter 83 gave the Commissioner of Health (the "Commissioner") responsibility for overall supervision and administration of the hospital rates. The Commissioner, in conjunction with the Health Care Administration Board (the "Board"), proposes the rate schedule and determines, in accordance with the statute, the types of charges that should be included in hospital rates. Additionally, the law created the New Jersey Hospital Rate Setting Commission (the "Commission"). The Commission approves hospital rates. N.J.S.A. 26:2H-4.1; 26:2H-18.1; 26:2H-18.9; N.J.A.C. 8:31B-3.72; N.J.A.C. 8:31B-3.39. The New Jersey Department of Health (the "DOH") oversees the Commission and administers the rates.

 In order to help contain costs, Chapter 83 set hospital rates prospectively, instead of upon actual cost. Under Chapter 83, various procedures are divided into diagnostic related groups ("DRG"), and a rate is assigned to each DRG. Instead of charging actual costs incurred by a hospital for treating an individual patient, the hospital has to charge the DRG rate which is designated for that classification. Despite the calculation of bills without regard to actual costs, a hospital bill still reflects a charge that previously represented actual costs. This charge is categorized as "total costs." A "DRG" charge also appears on a patient's bill.

 A particular hospital's DRG rate consists of a weighted average of the cost incurred by that specific hospital to treat a particular illness and the average cost incurred by hospitals throughout the state to treat the condition. Accordingly, this system penalizes a hospital that incurs costs greater than that allocated to a particular DRG category and rewards hospitals that provide more efficient services for a particular DRG. *fn3"

 Additionally, as part of its DRG rate, a hospital must include a charge for uncompensated care. Uncompensated care consists of both care to the indigent and expenses that result from bad debts. N.J.S.A. 26-2H 18.d; N.J.A.C. 8:31B-3.41; 8:31B-7.1. This charge stems from a hospital's mandate to admit anyone regardless of his or her ability to pay. *fn4" Only hospital patients incur costs for uncompensated care. In order to receive funds for uncompensated care a hospital must determine whether a patient has any health insurance.

 Furthermore, hospitals that treat patients who have Medicare can recoup only the amount allotted by the Medicare system for the particular treatment. Medicare invariably pays less than the DRG rate allocated for a particular condition. N.J.S.A. 26H-18.1c, however, permits the Commissioner with the approval of the Board, "to adjust the DRG rate to account for costs incurred by statutes and regulations that affect the delivery of health care." Pursuant to this statute, the Commissioner, with the Board's approval, enacted N.J.A.C. 8:31B:3.73. This regulation allows the hospitals to include in their DRG rate an amount necessary to recover the difference between the Medicare rate of payment and the DRG rate. These costs are borne by non-medicare patients.

 Moreover, Chapter 83 allows the Commission to decrease hospital costs for certain classes of payors. In particular, the Commission may grant a "payor differential" if it is supported by a "quantifiable economic benefit such as the degree of promptness and volume of payment to the hospital." N.J.S.A. 26:2H-18b. Pursuant to this provision, the Commission has granted a 2.2% discount to plans such as Blue Cross. None of the Benefit Plans currently receive such a discount. Only the Carpenter's Union Trust Fund (the "Carpenter's Union"), has requested such a discount. The Commission has not yet reached a decision as to the Carpenter's Union's application.

 In addition to the 2.2% discount the Commission grants an 11% discount to plans with open enrollment. Because the Benefit Funds must limit their enrollment to union members and their families, the Benefit Funds cannot receive this discount. The bills of patients who did not belong to plans that received these discounts were increased in order to supply hospitals with the reduced income they lost because of the discounts. N.J.A.C. 8:31B-3.39.

 Regulations, promulgated in accordance with the rate setting scheme, contain an appeal process for individuals whose DRG costs exceed their total costs by $ 250.00. Individuals who have third party insurance that does not reimburse the hospital according to DRG rates or that contains a deductible are not eligible to appeal. Accordingly, none of the individual plaintiffs can avail themselves of the appeal process.

 The Benefit Plans do not provide the same type of payments for hospital costs incurred by their members. For example, the District Council of Ironworkers of Northern New Jersey Welfare Fund (the "IWF") Benefit Plan covers 95% of the actual hospital costs incurred by its members. *fn5" The NYSA-ILA Welfare Plan, however, compensates the hospital for about 75% of the total fees charged to its participants. Still, other Benefit Plans pay 100% of the DRG charges.

 Plaintiffs instituted their Second Amended Complaint against certain New Jersey entities and administrators employed by New Jersey who are associated with the rate setting provisions (the "State Defendants"). *fn6" Plaintiffs also sued various hospitals (the "Hospital Defendants") (with the State Defendants collectively the "defendants"). The Hospital Defendants must charge DRG rates in order to maintain the licenses that permit the hospitals to provide health care.

 In their complaint, plaintiffs allege that this Court must strike down New Jersey's hospital rate setting scheme for the following reasons: (1) the scheme is pre-empted by § 501(a) of ERISA, 29 U.S.C. § 1132(a), and by § 186(c) of the Taft Hartley Act, 29 U.S.C. § 186(c); *fn7" (2) it deprives plaintiffs of the due process and equal protection rights guaranteed to them under the Constitutions of the United States and the State of New Jersey; (3) it constitutes a taking of property without just compensation under the United States Constitution; (4) it imposes a special tax law in violation of the New Jersey Constitution; and (5) it improperly delegates taxing power to the Commissioner because it gives the Commissioner "unchecked power" to establish hospital rates.

 In addition to contesting each of the allegations asserted by plaintiffs, the defendants contend that this Court has no authority to hear this case. First, the State Defendants assert that the Eleventh Amendment protects them from the instant lawsuit. Second, the defendants allege that if the hospital rates constitute a tax, the Tax Injunction Act prohibits this Court from hearing the instant motion.

 III. DISCUSSION

 A. State Immunity Under the Eleventh Amendment

 The state Defendants allege that they have not consented to suit and therefore, the Eleventh Amendment forecloses any action against them. The Eleventh Amendment does not prohibit suits for prospective injunctive relief and declaratory relief against state agencies and state officials where plaintiffs contend that actions taken by these agencies and officials, in their official capacity, have violated the federal constitution or federal statutes. Geis v. Board of Education of Parsippany-Troy Hills, 774 F.2d 575, 580 (1985). This exception to immunity applies even if issuing the declaratory or injunctive relief would reduce state funds. Edelman v. Jordan, 415 U.S. 651-52, 94 S. Ct. 1347 1358-59, 39 L. Ed. 2d 662 (1974). similarly, suits that seek injunctive relief and assert that the state exceeded powers granted to it by its own constitution are not prohibited by the Eleventh Amendment. Capitol Industries-Emi, Inc. v. Bennett, 681 F.2d 1107, 1120 (9th Cir.), cert. denied, 459 U.S. 1087, 103 S. Ct. 570, 74 L. Ed. 2d 932 (1982).

 Because plaintiffs seek solely prospective injunctive and declaratory relief, the Eleventh Amendment does not bar their action commenced against any State Defendant. Moreover, even if this Court's ruling decreases funds available to the state with which they can help defray the costs of medical expenses of its citizens, this still does not foreclose this action against the State Defendants. Likewise, the Eleventh Amendment does not preclude plaintiffs' claim that the Legislature unconstitutionally delegated the taxing power to the Commission.

 B. Application of the Tax Injunction Act (the "TIA")

 Before this Court can consider the merits of the motions before it, the Court must decide whether the TIA bars any of plaintiffs claims.

 The TIA provides:

 The district court shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.

 28 U.S.C. § 1341. Accordingly, in order to determine whether an action falls under the TIA the Court conducts a two-step analysis. First, the Court must determine if the charge at issue constitutes a tax. If the expense is a tax, then the Court must decide whether the State provides a "plain speedy and efficient remedy." 28 U.S.C § 1341. *fn8"

 At the outset, this Court notes that the TIA clearly applies to the types of claims and relief that plaintiffs seek. First, it is well settled that actions for declaratory relief as well as for injunctive relief are barred by the TIA. See Franchise Tax Board v. Alcoa Aluminum, Ltd., 493 U.S. 331, 110 S. Ct. 661, 107 L. Ed. 2d 696 (1990). Additionally, the TIA encompasses federal constitutional challenges to the imposition of a state tax. See Hardwick v. Cuomo, 891 F.2d 1097, 1100 (3d Cir. 1989) (plaintiffs' equal protection challenge to imposition of non-resident tax barred by TIA).

 The difficult question faced by this Court is whether any of the costs included in the DRG rate constitute a tax. Initially, this Court finds that it must conduct its analysis under federal and not state law. Robinson Protective Alarm Company v. Philadelphia, 581 F.2d 371, 374 (3d Cir. 1978) ("'Tax under state law' in 28 U.S.C. § 1341 should be determined as a matter of federal law by reference to congressional policies underlying the Tax Injunction Act, rather than by adoption of state tax labels developed in entirely different legal contexts."). *fn9"

 No bright-line exists between assessments which are "taxes under state law" and those which are not. Recently, the court in Butler v. Maine Supreme Judicial Court, 767 F. Supp. 17, 18 (D. Me. 1991), concisely stated the accepted definition of "taxes." In general, "assessments imposed primarily for revenue-raising purposes are 'taxes,' while those levies assessed for regulatory or punitive purposes, even though they may also raise revenues, are generally not 'taxes.'" Id. (citations omitted).

 The Third Circuit has followed this definition. For example, in Robinson, the Third Circuit held that an assessment of 5% of gross earnings levied upon alarm station companies who used underground wires constituted taxes. The Court examined the character of the assessments. It found that the taxes were "collected annually in a manner similar to other gross receipts levied." Moreover, it noted that the monies collected were "added to the public fisc rather than applied exclusively to contractual services owed central alarm station companies." *fn10" Thus, the court concluded that Philadelphia taxed the plaintiffs under the TIA. See also Butler, 767 F. Supp. at 17 (D. Me. 1991) (state exacted tax from plaintiffs when it imposed $ 300 jury fee on plaintiffs in state court action. Fees collected were "funnelled into Maine's general fund [and not] applied directly to the costs of jury trials.").

 The dictum announced by the Third Circuit supports the conclusion that if Philadelphia applied the revenue collected to the regulated industry, the court would have held that Philadelphia did not tax the alarm station companies. Cf. Rural Telephone Coalition v. F.C.C., 838 F.2d 1307 (D.C. Cir. 1988) (FCC order to allocate 25% of traffic sensitive costs from local telephone companies to long distance telephone did not impose a tax. Primary purpose of the ruling was not to raise revenue but only to regulate rates.); Brock v. Washington Metropolitan Area Transit Authority, 796 F.2d 481 (D.C. Cir. 1986), cert. denied, Washington Metropolitan Transit Authority v. Brock, 481 U.S. 1013, 107 S. Ct. 1887, 95 L. Ed. 2d 494 (1987) (statute that mandated employers to contribute to special fund from which several types of workers compensation payments were made did not impose taxes on employers. Statute's primary purpose was to "regulate liability for industrial accidents" and not to finance the government's general programs. Fund was segregated from other fees collected.) Head Money Cases, 112 U.S. 580, 28 L. Ed. 798, 5 S. Ct. 247 (1884) (Duty on immigrants collected from shipowners and segregated into its own fund which was imposed in order to defray the expense of regulating immigration and for the care of immigrants did not exact a tax from shipowners but instead only implicated the Coerce Clause).

 Guided by the dictum in Robinson, this Court holds that the contested costs included in the DRG rate do not constitute a tax. The state never uses the money collected from plaintiffs for the general welfare. Additionally, the fees collected are never intermingled in a general fund. Instead, the fees defray the costs that hospital's incur pursuant to state regulation of hospital costs. Hence, this Court finds the TIA does not apply. Accordingly, this Court has jurisdiction over plaintiffs' claims.

 Courts in various circuits have found that special assessments collected by the government to fund specific programs constitute a tax under the TIA. For example, in Tramel, the Fifth Circuit held that a special street improvement assessment levied on plaintiffs who owned land which abutted the streets that the City wanted to improve constituted a tax. 505 F.2d at 1312. The court reasoned that to hold otherwise would defeat the purposes of the TIA. In particular, the court held a contrary finding ...


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